by Chet Currier –
A hungry multitude of investors is about to open the doors to a cupboard that is almost bare.
The throng we speak of is the U.S. Baby-Boom generation born after World War II. Its 75 million members will soon start hitting age 60, reaching the time of life when savers’ and investors’ minds start turning seriously to income.
The meager store that awaits them is the menu of current interest- and dividend-paying offerings in bonds, stocks and money-market securities.
“We’re all growing older,” says Margo Cook, who oversees $5.7 billion in bonds and other fixed-income investments at Bank of New York Co. “There’s just not a lot to buy.”
Bonds? Well, somebody who might have put together a retirement plan 10 or 15 years ago figuring on typical yields of about 8 percent now finds Treasury bonds and notes paying 4.3 percent to 4.6 percent.
After 15 months of increases in short-term interest rates by the Federal Reserve, the average seven-day yield of money market mutual funds has just recently edged up to 3.1 percent. Stock dividend yields average a measly 2 percent, as measured by the latest Bloomberg data for the benchmark Standard & Poor’s 500 Index.
If you mix those three major asset classes in equal proportions, you get a portfolio that throws off income at about a 3.2 percent clip. For perspective, a 3.2 percent annual return on a nest egg of, oh, $400,000 amounts to $12,800 a year, or $1,067 a month.
That’s not a lot from which to pay even the basics — the rent, the food and medical bills. What’s more, if the surveys that get published regularly are right, $400,000 is way beyond what many people have at their command.
In its annual “retirement confidence” survey for 2005, TIAA-CREF, the largest U.S. retirement fund, says, “More than half of all workers report less than $50,000 in total savings and investments [excluding their home].” More than half, likewise, say they are “behind schedule when it comes to planning and saving for retirement.”
It’s easy to shrug off this kind of research as self-serving when it comes from enterprises that want to drum up retirement business. No matter how you look at it, though, even people who might have believed they were saving adequate amounts may find themselves in trouble when they look to put their plan in effect using, say, an intermediate tax-exempt bond fund that yields 4 percent or less.
All this comes at a time when increasing numbers of retirees will be operating not with an old-style pension plan from their employers, but with money they must manage themselves in 401(k) and similar self-directed accounts.
Now, factor in everything you’ve heard about impending stresses on the Social Security system — and then reflect on how little has been accomplished in the big debate this year over its reform.
All this suggests that such standard market preoccupations as the level of stock prices or the direction of interest rates may be increasingly overshadowed in the years ahead by laments about the scarcity of good income-producing investments. The problem has already begun to make its presence felt.
The scramble for income in the markets has helped push bond yields lower even as short-term rates were rising, and has shrunk the premiums people receive for taking greater risk in vehicles such as junk bonds and emerging-markets bonds.
“One story that has gone underreported in the popular press is just how challenging the past several years have been for those investing during their retirement,” says analyst Christine Benz in a recent Web site commentary for mutual-fund researchers Morningstar Inc. “Even those seniors who didn’t make big portfolio mistakes have been quietly fighting an uphill battle.”
In politics, investors are often spoken of as wealthy people not deserving of much sympathy or help. And yes, Baby Boomers belong to one of the most prosperous generations ever to walk the earth. Even so, the TIAA-CREF data remind us that many aren’t fat cats by any means.
As a group, Boomers are used to speaking up for what they want and getting it: Education in the 1960s, for starters, then jobs in the 1970s. They are world-class consumers of long standing.
They aren’t at all the sort of people to fade quietly into retirement — especially a retirement that the markets aren’t ready to finance in the style they have come to expect.
Chet Currier is a Bloomberg News columnist. He can be reached at ccurrier@bloomberg.net.
Source: Ft. Lauderdale Sun Sentinel
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